Heat Off Aussie Bank Debt Costs

Recent debt issuance by the country’s lenders is showing three clear trends.

Bloomberg News

The first is that borrowing markets across the globe are wide open for Aussie credit. More importantly, the second point is that investors are only too keen to buy, something that can’t be said for many European lenders. The third is that bond spreads have tightened sharply compared with levels at the start of the year, although pricing is still wide compared to early 2011.

In January the Commonwealth Bank of Australia–one of the big four lenders here–priced a EUR1.5 billion five-year covered bond at 100 basis points over mid swaps. That cost of funds triggered a cascade effect which culminated in a blow out in the risk premium demanded by local investors, meaning banks were forced to pay dearly in their local market too.

Prices rocketed for unsecured debt–the banks’ preferred form of lending– and signaled a major re-pricing of domestic credit. In the short period since January, those funding spreads have tightened sharply. Westpac was last week rewarded for its patience when its inaugural euro denominated four-year covered bonds priced at 72 basis points over swap.

Fund managers say spreads are also tightening in secondary trade, which bodes well for the bank funding market. Such was the demand for Westpac’s issue that it priced inside the initial 75-80 basis points guidance. The total book build hit EUR4.0 billion. German, UK, Scandinavian, French, Spanish and other investors poured into the offer.

Banks bought 39% of the deal but asset managers, insurers and central banks were all in the mix. Much of the pickup in funding sentiment is being credited to the “Prussian Roman,” otherwise known as Mario Draghi, president of the European Central Bank. His move in December to offer banks cheap loans has boosted credit markets across the world. And Australia’s AA rated banks are among the beneficiaries.

For a country obsessed with bleating over mortgage rates, the worst may be over.

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